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Sanctions-related amendments to the Russian Commercial Procedure Code

This overview summarises the recent amendments to the Russian Commercial Procedure Code (“Commercial Procedure Code”) 1 relating to disputes involving sanctioned persons. The new law, which comes into effect on 19 June 2020, has already received significant criticism from the business community and legal professionals, both as to the substance of the new rules and their form. This note analyses the practical implications of the amendments.

 

The substance of the new rules on the exclusive jurisdiction of Russian courts

Anti-Russian sanctions have become the new reality for Russian parties and their counterparties. The amendments to the Commercial Procedure Code are stated to have been enacted in response to difficulties faced by Russian parties who are unable to arbitrate or litigate outside Russia by virtue of various “restrictive measures”. 2

Under the new rules, Russian courts will have exclusive jurisdiction over disputes involving sanctioned persons, as well as over disputes arising from sanctions imposed on Russian entities and individuals, 3 where:

a There is no arbitration or choice of court agreement; or

b) There is a valid agreement to arbitrate, or litigate, outside Russia, but it becomes unenforceable as a result of sanctions creating “obstacles” for “access to justice” (the meaning of these terms is discussed below). 4 From a literal reading of the law, it is unclear whether an agreement to arbitrate “outside Russia” refers to arbitrations seated outside Russia or arbitrations administered by foreign institutions (or both).

When these circumstances exist, a sanctioned party is entitled to apply to a Russian commercial court either to have its claim resolved on the merits, provided that an identical dispute is not already pending before a foreign court or tribunal, 5 or to obtain an anti-suit injunction prohibiting foreign proceedings (addressed further below).6

Sanctioned persons are defined as: 7

a) Russian legal entities and individuals against whom restrictive measures have been introduced by a foreign state or international organisation or union, or

b) Non-Russian legal entities against whom restrictive measures have been introduced in connection with restrictive measures imposed on Russian entities or individuals.

Accordingly, the scope of the new law is not limited to any specific sanctions. It extends to any sanctions, both personal and sectoral, that have been, or will be imposed in the future, by any foreign state or international organisation or union.

 

Practical implications of the new rules on the exclusive jurisdiction of Russian courts

From a practical perspective, the new rules on exclusive jurisdiction over cases in which no choice of dispute resolution forum is made will have limited effect on complex commercial transactions with valid and well- drafted dispute resolution clauses. Parties may, however, seek to use these amendments to bring to Russia non-contractual disputes that may not be covered by choice of forum agreements and would not have otherwise been subject to the Russian courts’ jurisdiction.

Where there is no choice of forum agreement, the new law on its face enables both Russian and foreign parties to bring before Russian courts disputes unrelated to anti-Russian sanctions or Russia: it is sufficient for the claimant to be subject to sanctions imposed as a result of anti-Russian sanctions. This follows from the definition of a “sanctioned entity”, which includes foreign parties against whom restrictive measures have been taken in connection with restrictive measures imposed on Russian entities or individuals. Accordingly, if, for example, an Indonesian company transacts with a Russian counterparty and thereby becomes subject to certain retaliatory sanctions, it will be entitled to sue its counterparty (for example, from Australia) in a wholly unrelated transaction in a Russian court. 8 Arguably, there is potential for the new rules to be misused to artificially create jurisdiction over disputes wholly unrelated to Russia.

Another central provision is the one regarding “obstacles” which may render unenforceable otherwise valid dispute resolution clauses (new Article 248.1(4) of the Commercial Procedure Code).

In this regard, not unusually, the new law delegates to the courts a wide margin of discretion. Its practical impact will therefore largely be determined by the Russian courts’ interpretation of “obstacles” for “access to justice” and the “unenforceability” of dispute resolution clauses, which must be conducted with due regard to the governing law of such clauses. What proof would be sufficient to demonstrate that a choice of forum agreement has become unenforceable as a result of sanctions that have created “obstacles” for “access to justice”, remains an open question. 9 For example, it is unclear whether significant delays on the part of an arbitral institution in processing a request for arbitration or accepting payment on account of arbitration costs will suffice, or whether the applicant will be required to proffer evidence of more substantive or permanent “obstacles”. Taking into account the recent trends in court practice (particularly of the lower courts) in arbitration-related cases, there is a risk that the balance will at times tilt towards an unreasonably broad interpretation of “obstacles” and “unenforceability”.

However, the above provision of the new law does not contain any substantive new rules.

First, the Russian courts were already entitled to disregard an unenforceable arbitration clause on the basis of general rules on the enforceability of arbitration clauses. 10

There is no clearly articulated test in case law as to when an arbitration clause is to be deemed unenforceable. In one of the cases, the Russian Supreme Court stated that the applicant had to prove “circumstances preventing the resolution of a dispute by an arbitral tribunal”, which could include, among others, the claimant’s “state of insolvency”. 11 There has also been at least one case in which a Russian court held an arbitration clause to be unenforceable as a result of US sanctions against a Russian party, but it does not contain any universally applicable guidance. 12

In this context, the provisions of the new law provide little additional clarity as to what the relevant test is. It is also unclear whether “unenforceability” and “obstacles” are intended to cover only circumstances when a sanctioned party is unable to commence or pursue proceedings (i.e. issues of procedure), or to extend also to circumstances when certain remedies are no longer available due to sanctions.

Second, the new law does not substantially simplify the procedure for a party bringing a claim before a Russian court notwithstanding the existence of an arbitration clause. Nothing in the amendments suggests that the courts are now ex officio required to verify whether a dispute resolution clause has in fact become unenforceable. The relevant party is required to file an application in order for the court to consider the enforceability or otherwise of the arbitration agreement.

It follows from a literal reading of the new law that its scope is limited to agreements to arbitrate “outside Russia”, and does not affect agreements to arbitrate “in Russia”. “Arbitration outside Russia” may be interpreted either as a reference to arbitrations seated outside Russia, or arbitrations administered by foreign arbitral institutions, or both. The amendments may therefore prompt some parties that otherwise would have selected foreign arbitral institutions, to select Russian institutions as a more predictable option.

The law does not draw a distinction between foreign institutions with a Russian licence or those without, which means that arbitration agreements selecting licenced institutions may be equally affected. It remains to be seen whether foreign arbitral institutions that have been licenced will implement any specific protocols in connection with the amendments.

Overall, aside from the provisions establishing exclusive jurisdiction in the absence of a choice of forum agreement, the new rules do not constitute a significant departure from the current regime from a legal perspective. However, there is a risk that the new rules will be perceived by both parties and Russian courts as a greater change than they in fact are. This in turn could add further complexity to international deals involving Russian parties.

 

Anti-suit injunctions

The new law allows a sanctioned party to apply to a Russian court for an injunction prohibiting the other party from initiating a new case, or pursuing an existing case, before a foreign court or arbitral tribunal. 13 Such “anti- suit injunctions” may be obtained only in respect of disputes arising from sanctions or disputes involving sanctioned entities falling within the Russian courts’ exclusive jurisdiction. 14 In practical terms, sanctioned parties may attempt to use anti-suit injunctions as a universal tool against undesirable proceedings outside Russia.

The party applying for an anti-suit injunction must demonstrate that the Russian courts have exclusive jurisdiction over the dispute at hand and in particular, where relevant, that the choice of forum agreement is unenforceable. 15

A sanctioned party who has obtained such an injunction is entitled to seek compensation if the other party fails to comply with it. 16 The amount of compensation may be as high as the entire amount of the claim brought abroad, plus legal expenses incurred by the sanctioned party. 17

Anti-suit injunctions are subject to limited review by higher courts. They may be challenged only in the cassation courts (bypassing appellate review), where evidence is not re-evaluated and review is limited to examining whether the law has been applied correctly.

There are a number of practical implications and problems arising from the new rules.

First, the new rules may be seen as equating an application for an anti-suit injunction with an objection to the foreign court’s or tribunal’s jurisdiction. 18 Sanctioned parties may seek to use this to circumvent the widely accepted waiver rules, which preclude a party that did not raise jurisdictional objections in the underlying proceedings from using them subsequently at the enforcement stage. On the other hand, the new rules are open to an interpretation whereby failure to raise jurisdictional objections (or apply for an anti-suit injunction) precludes a sanctioned party from resisting the enforcement of the resultant foreign award (or judgment) on the basis of such objections. 19

Second, an anti-suit injunction may only be obtained through inter partes proceedings. 20 In practice, this may result in significant delays, particularly where the respondent is a foreign party that must be served under the Hague Service Convention or another treaty (which may take months or even more than a year). 21 In such cases, anti-suit injunctions may prove to be of little practical value in circumstances where claims in foreign proceedings may already be determined by the time an injunction is issued.

Finally, the prospects of enforcing anti-suit injunctions abroad are uncertain, given the limited number of countries where Russian court decisions may be enforced on the basis of international treaties. Even where treaties do exist, a question may arise as to whether they apply to such injunctions. As to the principles of comity and reciprocity, it is worth noting that Russian courts have consistently refused to recognise and enforce foreign anti-suit injunctions. 22

Accordingly, new anti-suit injunctions will likely become yet another idiosyncratic domestic tool, with limited extraterritorial effect, but with potentially significant repercussions for foreign businesses in Russia.

 

Please also see: Sanctions-related amendments to the Russian Commercial Procedure Code PDF in Russian

 

1 Introduced by Federal Law No. 171-FZ dated 8 June 2020.
2 Explanatory note to Draft Law No. 754380-7 (subsequently Federal Law No. 171-FZ).
3 New Article 248.1 of the Commercial Procedure Code.
4 New Article 248.1(4) of the Commercial Procedure Code.
5 New Article 248.1(3)(1) of the Commercial Procedure Code.
New Article 248.1(3)(2) of the Commercial Procedure Code.
7 New Article 248.1(2) of the Commercial Procedure Code.
8 Provided that there is no choice of forum agreement.
9 New Article 248.2(2)(4) of the Commercial Procedure Code.
Article 148(1)(5) of the Commercial Procedure Code provides that the court must leave a statement of claim without
consideration if, not later than at the time of the first submission on the merits, any party objects to the court’s
jurisdiction on the basis of the existence of an arbitration agreement, unless the court determines that such an
agreement is unenforceable or invalid. Similar rules apply to choice of court agreements by virtue of Paragraph 11 of
Resolution of the Plenary Session of the Russian Supreme Court No. 23 dated 27 June 2017 p.
11 Ruling of the Russian Supreme Court dated 12 July 2017 No. 307-ES17-640.
12 Resolution of the Ninth Commercial Appellate Court dated 10 February 2020 in case No. A40-149566/2019
(upholding the first-instance judgment). The Ninth Commercial Appellate Court noted that sanctions prohibited the US counterparty of a Russian entity from making any payments to the latter, which made it impossible to enforce any award against the US party outside Russia. This, in the court’s view, rendered the relevant arbitration clause
unenforceable. The decision on the cassation appeal in this case is currently pending.
13 New Article 248.2 of the Commercial Procedure Code.
14 New Article 248.2(1) of the Commercial Procedure Code. The new rules on exclusive jurisdiction are addressed above.
15 New Article 248.2(2)(4) of the Commercial Procedure Code.
16 New Article 248.2(10) of the Commercial Procedure Code.
17 Id. It is not entirely clear whether this provision permits the sanctioned person to recover only legal expenses incurred in the Russian proceedings or those incurred in the foreign proceedings as well.
18 New Article 248.1(5) of the Commercial Procedure Code.
19 Id.
20 Article 248.2(6) of the Commercial Procedure Code.
21 Generally, the Russian courts may adjourn proceedings for up to one year for the purpose of the notification of a
foreign party. See Article 253(3) of the Commercial Procedure Code.
22 See e.g. Paragraph 52 of Resolution of the Plenary Session of the Russian Supreme Court No. 23 dated 27 June 2017 (holding that a foreign court’s anti-suit injunction does not preclude a Russian court from resolving a case within its jurisdiction).

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